Option Strategies

Protective Put

In plain English

You own shares and buy insurance against a drop. You pay a premium hoping you waste it — like car insurance you never claim.

Good fit if

You want to keep your shares but sleep better through a known risky event (earnings, news, volatility).

Beginner mistake

Buying puts too late after the stock already crashed — insurance gets expensive exactly when you wish you had bought it earlier.

In this strategy we start out by owning 1,000 shares of Bank of America (BAC), similar to the covered call example. On June 12, 2026, you own the shares at a cost basis around $48 but BAC is trading near $57. You are worried about a near-term dip before an earnings report yet still want to hold the stock long term. You buy 10 put options (1,000 shares of coverage) on the June 19, 2026 expiration.

You pay $1.25 per share ($125 per contract, $1,250 total). That cost reduces your on-paper gain, but it caps how badly a sudden drop can hurt you. How? A put gives you the right to sell your shares at the strike price.

Suppose you buy the $55 strike. BAC reports weak results and falls to $50/share. Without the puts, your shares lost $7 each on paper from the $57 starting point — a painful mark-to-market hit on 1,000 shares. With the $55 puts, you have the right to sell at $55, limiting your effective exit well above $50. The difference between the $55 strike and the $50 market ($5 * 1,000 shares = $5,000) is the protection value, minus the $1,250 you paid for the puts.

Illustrative premiums based on mid-June 2026 BAC option prices; live quotes will differ.